Questor: this healthcare trust has taken a pounding but is now turning the corner – buy

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Investors in Worldwide Healthcare Trust have experienced a bumpy ride over the past year.

The £2.2bn trust, which owns a range of health-related stocks, delivered an impressive 30pc net asset value (NAV) return over the 12 months to the end of March 2021, outpacing a 16pc rise by the MSCI World Healthcare index over the same period. However, it has been a remarkably different story since then.

Worldwide Healthcare’s NAV declined by 6pc over the year to the end of March 2022, against a 21pc rise by the index. This is in large part down to serious weakness among those of its holdings deemed innovative or fast growing. They include biotech firms, which account for 20pc of the portfolio.

“Last year was an abysmal year for biotech and that affected our performance,” said Sven Borho, co-manager of Worldwide Healthcare.

Following a strong 2020, when biotech firms played an important role in the fight against Covid, investors started to question lofty valuations in the sector. Things went from bad to worse in late 2021 as it became clear that central banks would start to raise interest rates in response to higher inflation.

This caused investors to re-evaluate the prospects of fast-growing companies in the technology and biotechnology sectors, which had been prized for the promise of their future earnings. As higher interest rates diminish the value of these earnings, investors turned their attention to “value” stocks instead. These are assessed relative to their profits in the here-and-now.

“Coinciding with the sell-off in biotech, emerging market names pulled back significantly as well last year. There was no hiding there either,” Borho added.

While this may make for grim reading, the good news is that things appear to be looking up for Worldwide Healthcare following a 5pc NAV return in March. Peter Hewitt, who owns the fund in his BMO Managed Portfolio Trust, puts this down to the resilience of its holdings in pharmaceutical stocks, healthcare providers, health insurers, diagnostic and medical technology companies.

What’s more, a question mark that has hovered over the healthcare sector – potential drug pricing reform in America – appears to be fading. Drug pricing proposals included within Joe Biden’s Build Back Better Act have been described by Borho as “patient and industry friendly”. While they aim to lower patients’ “out-of-pocket” expenses, they do not materially alter the current system of drug pricing, which is broadly positive for pharmaceutical and biotech companies.

Now that the dust is starting to settle after a challenging year, there are bargains to be had for brave investors: healthcare stocks continue to trade at a substantial discount to the American stock market, while biotech valuations are at a 20-year low. Borho says he suspects that acquisitive companies will be drawn to these cheap-looking stocks, which should lift valuations.

Similarly, Worldwide Healthcare itself looks cheap on a 4.3pc discount; it has typically traded at a premium over the past five years. Although performance has disappointed in recent times, its long-term record remains intact: shareholders have benefited from a 332pc share price gain over the past decade – and we see no reason why this can’t be repeated.

“We are past the worst, there is no question about that,” says Hewitt.

As interest rates rise in response to higher inflation and as the war in Ukraine causes geopolitical risk to come to the fore, there is an increased likelihood of slowing economic growth or even recession later this year or next year. If this turns out to be the case, healthcare stocks should prove resilient thanks to their “secular growth” characteristics; there will be continued demand for their products regardless of what happens to interest rates or economic growth.

“If the going gets tougher for the economy and markets the rest of this year, Worldwide Healthcare is the sort of trust that will prosper,” Hewitt adds.

This column agrees. There is an attractive buying opportunity here for an investor with a healthy risk appetite and a long-term horizon, although you should be prepared for further bumps along the way.

Questor says: buy

Ticker: WWH

Share price at close: £33.15

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